Wednesday, July 15, 2015

IRS: Kentucky must pay FICA for pension funds

State
government faces an unexpected $5 million to $6 million increase in
personnel costs in a couple of years but the impact of an Internal
Revenue Service ruling could have an even bigger impact on budgets of
local governments and school districts.

State
officials have been informed by the IRS they must start withholding
Social Security and Medicare taxes from employees’ contributions to
their pension plans and the state — or local government employer — will
have to match those contributions.

The
7.65 percent deductions have always applied to most of state workers’
pay but for many years it wasn’t applied to that portion contributed to
their retirement systems.

That
was because of an opinion the IRS issued in a private letter in
response to questions from the administration of Martha Layne Collins
who was governor from 1983 to 1987, according to Mary Lassiter,
Secretary of Gov. Steve Beshear’s executive cabinet.

Lassiter
said the state for decades relied on that opinion which said
contributions to the retirement funds weren’t subject to withholding
provisions of the Federal Insurance Contributions Act or FICA to fund
Social Security, survivor benefits and Medicare.Lassiter
said the IRS “subsequently changed course and said we could no longer
rely on the (previous) ruling. It also affects other states, not just
Kentucky.”

It
affects employees’ net pay too, because 7.65 percent of the amount
contributed to pensions will now be withheld for FICA, an amount the
state must match.

Kentucky learned about the change about a year ago and has been negotiating with the IRS on how to comply.

“We’ve
not signed any agreement with IRS, but we are in discussions with
them,”

Lassiter said. But the direction of the discussions generally
have included a start date of January 2017 for withholding and have not
included a “look-back” requirement for payment for previous years.

That factors large
in considering a challenge to the IRS decision, said J.D. Chaney,
deputy director of the Kentucky League of Cities whose members face
additional costs to their budgets as well.

“Absent
any sound legal foundation, we’re not considering a challenge because
of the possibility of past liability,” Chaney said.

He
hasn’t calculated the impact to local governments, but Chaney noted
cities employ hazardous duty personnel in fire and police departments
who receive larger pension contributions so the new withholding amounts
are likely greater for cities.

Spokespersons
for the Kentucky Department of Education and Kentucky School Boards
Association referred questions about the impact on school districts to
Beau Barnes, deputy executive secretary and general counsel for the
Kentucky Teachers Retirement System.

Barnes estimates the total cost statewide will be about $55 million a year, including schools and local governments.

While
most employees won’t like the additional withholding, Lassiter said it
will ultimately increase their Social Security benefits, except for
teachers. Teachers don’t receive Social Security benefits, although they
contribute 1.45 percent of pay to the Medicare portion of FICA, an
amount matched by their school board.

Barnes
said the withholding won’t affect the financial soundness of state
retirement systems or how much the legislature must contribute to them.
Kentucky’s retirement plans are among the most troubled nationally and
lawmakers continue to struggle with ways to shore them up.

It’s
not known how much Beshear’s recent decision to increase the minimum
wage for about 780 state employees to $10.10 an hour or recent raises
for engineers in the Transportation Cabinet will impact the final FICA
withholding cost to the state.

But
$5 million to $6 million is a relatively small amount in a $10 billion
General Fund. Still, House Budget Chairman Rick Rand, R-Bedford, said it
will make lawmakers’ jobs harder.

“It’s
nothing we can’t overcome,” Rand said. But much of the budget is tied
to fixed costs and lawmakers have discretionary control over only a very
small portion of the $10 billion.

“This will just mean it’s that much less and that much harder to do things we need to do in other areas,” Rand said.

Rand
and his Senate counterpart, Sen. Chris McDaniel, R-Taylor Mill, only
recently learned of the problem. McDaniel said he hasn’t “been
officially notified” about the likely additional expense, but he has
begun to study its potential budget impact.

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On the campaign trail...with my wife Rita

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EDF 203 in EKU's one-room schoolhouse.

Professin'

Lecturing on the history of Berea College to Berea faculty and staff, 2014.

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